How Do Independent Contractor Fees Work?

Taxes on self-employed entrepreneurs include federal income tax, self-employment tax, local taxes, and state taxes. Independent and independent contractors report taxes on Form 1040 and Schedule C. Taxes expire on April 15 or October 15, if extended. Independent contractors must make tax payments or tax returns.

How do independent contractor fees work?

The types and value of taxes paid by independent contractors depend on the organizational structure of your business. A corporation, an LLC, or a partnership is considered transfer entities. This means that the income obtained is transferred to the personal income tax return and calculated based on individual income tax rates.

Independent contractors established as sole proprietors, pay self-employment tax, federal income tax, and state income tax on their net income. Independent contractors pay federal and state taxes throughout the year through estimated taxes. Self-employment revenue and related deductions are shown in Appendix C, along with the Independent Contractor's Form 1040.

Alternatively, independent contractors can organize their business or activities as an LLP, partnership, organization S, or other business entity. This can sometimes reduce the total value of taxes as an independent contractor. Single-owner SRLs pay taxes in the same way as independent contractors. Associations, S-bodies and other business entities have separate tax returns, with homeowners reporting and paying taxes on their share of net profits and offsets on the 1040 personal form.

What fees should independent contractors pay?

Independent contractors pay local, state, and federal taxes. At the national level, independent contractors pay federal and self-employment taxes on their net income. Independent contractors also pay income taxes in the state or states in which they live and work. Some cities or counties apply trade taxes, registration fees, or licenses.

Taxes that independent contractors must pay include:

• Federal Income Tax: This is reported on the federal income tax return on Form 1040; taxes of self-employed entrepreneurs at the national level are based on the total income of the year fewer tax deductions or credits; the tax rate varies from 10% to 37%, depending on the level of income.
• Autonomous Tax: this federal tax is the way independent contractors pay social security and state medical care, according to their level of income as a natural person; The tax rate is 15.3% of net income up to $ 132,900 (for 2019) and 2.9% of net income above this limit.
• Other federal taxes: Independent contractors may be required to pay other federal taxes, depending on their financial situation; other federal taxes include alternative minimum tax, net investment income tax, and additional Medicare tax
• Local and Municipal Taxes: Independent contractors may be required to pay income taxes, business taxes, registration fees, or licensing fees in the cities, counties, or states in which they live and work. 
• Sales Tax: If you sell products, you must collect sales tax from customers and repay it with the state income tax return; our Sales Tax Guide for Small Business can help you determine when to collect sales tax and how much to manage it.
• Excise taxes: In addition to sales tax, specific goods, and services sold may also be subject to excise duties; alcohol, tobacco, firearms, and telephone services are subject to individual taxes; For more information on the operation of personal taxes, see our unique guide on small business taxation.

The payment of estimated taxes is an act of balance. Overestimating means a reduction in working capital, but underestimation will leave one with a shocker bill when the year ends. Independent contractors using an accounting service will ensure that their payments are correct.

What do the tax rates for independent contractors include?

Tax rates for independent contractors at the federal and state levels vary by income. The federal income tax rate begins at 10% and constantly increases to 37% based on the person's marital status and taxable income after deductions. 

National tax rate

Federal income tax rates for self-employed entrepreneurs start at 10% and gradually increase to 37%, based on the taxable income that the independent contractor earns each year. Taxable income is the total amount of income remaining after deductions for which a person is eligible. Independent contractors acting as individual owners are considered transfer entities. This means that you will receive the net income of your business and will inform you of your 1040 tax return.

Own tax rate

The voluntary tax rate has two components. The first component is the social security tax of 12.4% on net income up to a maximum of $ 132,900 in 2019. The second component is the 2.9% Medicare tax, which applies to all net profits as an entrepreneur. As a result, the own tax rates are 15.3% of net income within the social security limit and 2.9% of net income above this limit.

The social insurance tax only applies to the first $ 128,400 in 2018. By 2019, the social security tax will apply to the first net profits of $ 132,900 from self-employment. The Medicare tax applies to the total net income from self-employment, without limitation.

Other federal taxes

Independent contractors may have to pay other federal taxes, in addition to income tax and self-employment tax. Some of these are based on actions taken by a person, such as the distribution of funds from a deferred pension plan before reaching retirement age. Other federal taxes are activated based on a person's income level throughout the year, such as the alternative minimum tax.

Other federal taxes as independent contractors to which you may be subject are:

• Tax on early retirement plans: An additional tax of 10% is added when a person withdraws money from a pension plan before reaching the age of 59 years.
• Alternative Minimum Tax (AMT): the AMT generally applies to independent contractors whose taxable income is equal to or greater than $ 191,500 and who are presented as single or married and declaring a joint declaration for the 2018 fiscal year; The calculation of the AMT tax is more straightforward than the regular rates because there are only two rates; 26% applies to taxable income below AMT limit - $ 191,500 for single taxpayers and the MFJ - and 28% above the AMT limit
• Net Income Tax: A 3.8% premium is applied when a person's adjusted gross income exceeds $ 200,000 for individual taxpayers and $ 250,000 if he or she is married and makes a joint return; the tax is applied to investment income for the year, such as interest and capital gains or the value of gross income adjusted above the above limits.
• Medicare Supplement: A 0.9% gain applies to net income as an independent contractor and wages as an employee, as income earned by a person exceeds $ 200,000 for singles and $ 250,000 for couples who enjoy a distinct advantage.

State tax rate

Tax rates for independent contractors at the state level vary by state of residence. If the office or business of the independent contractor has an office in another State, the contractor may be required to deposit and pay taxes in the other state. Each state sets its tax rates. New York, for example, applies tax rates ranging from a low of 4% to a high of 8.82%. You can find tax rates in your state by going to the state's tax agency.

What are the main tax deductions for independent contractors?

Several tax deductions can be made by independent contractors. Some of the significant tax deductions of independent contractors are home office expenses, purchase of equipment and supplies, health insurance, retirement savings, and other costs related to your business.

Deduction of the Ministry of the Interior

Independent contractors can deduct a portion of rent or mortgage, utilities and other household expenses, such as property or repairs insurance. The cost of home office deduction is based on the size of the office space expressed as a portion of the total number of places in the home. Offices should be used regularly and exclusively for business purposes. 

Health insurance premiums

Independent contractors can deduct the health insurance premiums they pay for themselves, their spouse, and their dependents. Insurance can be defined as an individual plan or as a collective plan established in the activity of the independent subcontractor. The deduction covers premiums paid for dental insurance, health insurance, and long-term care insurance.

Small business pension plans

Independent contractors may pay tax-deductible contributions to the pension plans. In addition to the traditional separate retirement accounts (IRAs) and Roth IRAs, independent contractors can deduct up to $ 56,000 (by 2019) by reserving money in a small business pension plan, such as a Simplified IRA for employees (SEP-IRA) or a single 401 (k)

Depreciation of computers, equipment, and furniture

Independent contractors can decrease the cost of machinery, computers, tablets, software, equipment, chairs, and furniture. These types of expenses are called impairment deductions. Independent contractors may choose to deduct costs for a few years or all at the same time that equipment or other activities begin to be used for commercial purposes.

Fees for cars and trucks

Independent contractors may deduct the cost of driving a car, truck, or SUV for their account. The deductible portion of taxes is based on the number of kilometers traveled by the vehicle to the business, compared to the total number of kilometers traveled in the year. The purchase price decreases as the car depreciating. Independent contractors may also deduct gasoline, insurance, registration fees, and repairs.

Deduction of qualifying business income

Independent contractors can deduct up to 20% of their net income. The deduction of eligible business income does not require expenses, unlike other deductions. Instead, the value of the deduction varies depending on the income of the independent contractor for the year and the nature of your business.

Contract and external services costs

Independent contractors often hire other subcontractors to help them complete their projects. The sums paid via the employment contract are tax-deductible. Please note that independent contractors must indicate on the form at least 1099USD on at least 600USD.

Cost of goods sold

Independent contractors who operate retail stores or wholesale or production operations may deduct inventory by deducting the cost of goods sold. The value of products sold represents the costs of producing or purchasing stock, and the amounts decrease in the year in which the stock is sold to customers.

Other expenses related to a commercial activity

Independent contractors may deduct expenses related to their operation. These may include liability insurance, telephone service, Internet service, business cards, professional organizations, professional training courses, office supplies, reference books, and tools.

To maximize tax deductions and, therefore, minimize the bill, independent contractors must keep accurate records throughout the year. However, accounting can be a last-minute idea for many freelancers: they are too busy to develop their business. An accounting department like Bench can make sure you have the information you need during the tax season for only $ 95 a month. You can start with a free online trial in minutes.